Hamish McRae: Trump may lash out, but he can’t halt China’s dominance

Trump (pictured) is lashing out, rather than planning a long-term policy to contain and channel Chinese economic ambitions: EPA

It’s better to have a truce in the trade war than another series of salvoes. But that is all it is. The dinner in Buenos Aires between Donald Trump and Xi Jinping has put a 90-day hold on the US decision to introduce new tariffs on Chinese imports for trade talks to take place. But if they don’t succeed, the 25% tariffs Trump has threatened will go ahead.

Since the restrictions already in place have been estimated by the OECD to knock 0.2% off US GDP by 2021 — and rather more off Chinese GDP — you might think that ramping things up further might not be a great idea. General Motors does not think it is. It has said that the steel and aluminium tariffs imposed earlier this year will cost the company $1 billion (£780 million). Though it did not directly link this burden to its new round of job cuts and factory closures, it must have played some part in the decision.

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Europe is caught in the crossfire too, because its car exports to the US also face 25% tariffs. A posse of German car manufacturers will visit Washington this week to try to persuade the White House to change policy.

Put like this, the whole idea of a trade war between the US and China seems absurd, a drama created by a former TV show host designed to show him as a hero with a few “wins” in negotiation. International trade, after all, is not a zero sum game. Both sides benefit from it — and both sides are hurt if it falters.

But I think that is the wrong way to think about what is happening. It isn’t just about trade: it is about the titanic struggle for global leadership between the US and China that will dominate the next 30 years.

There are two power shifts here. One is between the developed world and the emerging world, a shift exemplified by the fact that it was a Group of 20 meeting in Buenos Aires, rather than Group of Seven.

The G20 includes the large emerging economies; the G7 is the developed world club. According to a study by HSBC a couple of months ago, emerging countries will generate 70% of the growth in the world economy between now and 2030.

The second shift is between the US and China. China is the bigger contributor to growth and will, HSBC reckons, pass the US by 2030 to become the world’s largest economy.

The US will find this transition extremely difficult: according to calculations by the late Angus Maddison, it has been the world’s largest economy since the 1880s, when it passed… yes, China. (The UK was never the world’s largest economy, though it was the largest European one until it was passed by Germany around 1910.)

So this next decade will see the end of a 150-year period of domination by the US. Of course the US will be much richer per head than China for many generations to come. In a sense it does not matter that China can produce more steel or build more cars than anywhere else. What does trouble many people in the US — and Trump is responding to this concern — is that China has achieved this by unfair trading practices: in particular by stealing American technology. Putting tariffs on Chinese exports is a way to force China to accept more US imports, but also to protect US intellectual property.

Put this way, US policy appears more coherent than it is. Trump is lashing out, rather than planning a long-term policy to contain and channel Chinese economic ambitions. But it does represent a shift from the past, where the US tolerated China pushing trade practice to the limits of WTO rules, and arguably beyond them, on the belief that a more prosperous China would be a source of stability in the world.

That may well turn out to be true, but meanwhile China has built up its economy in part at least by keeping the US out of key areas.

If you take a snapshot of the world’s largest companies by market capitalisation, the US high-tech giants still dominate the league table, despite the recent wobbles. But the only challengers are Chinese: Tencent and Alibaba, both of which are in the top 10 and both of which have grown by adopting business models developed in the US.

If you look at the leading social media groups, the top three networks in terms of millions of active users are American: Facebook, YouTube and WhatsApp. Then comes WeChat (owned by Tencent) and Instagram (owned by Facebook). And after that come QQ and QZone, (both also owned by Tencent), TikTok, and Weibo — all Chinese.

Faced with an increasingly dominant China, America will strike back in whatever ways it can. That is what Trump is doing now. His trade war may not be part of a bigger plan, but it is very much part of the bigger picture — the battle for global economic leadership.